Money Supply

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What is 'Money Supply'

Money supply is the entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country's government or central bank. Public and private sector analysis is performed because of the money supply's possible impacts on price level, inflation and the business cycle. In the United States, the Federal Reserve policy is the most important deciding factor in the money supply.

Also called money stock.

BREAKING DOWN 'Money Supply'

The various types of money in the money supply are generally classified as "M"s such as M0, M1, M2 and M3, according to the type and size of the account in which the instrument is kept. Not all of the classifications are widely used, and each country may use different classifications. M0 and M1, for example, are also called narrow money and include coins and notes that are in circulation and other money equivalents that can be converted easily to cash. M2 included M1 and, in addition, short-term time deposits in banks and certain money market funds.

An increase in the supply of money typically lowers interest rates, which in turns generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

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RELATED FAQS
  1. Does M1 include foreign currency?

    Learn the definition of M1, as well as other categories of money supply in the United States. Learn how it may differ in ... Read Answer >>
  2. What types of money are included in money supply?

    Read about several different monetary aggregates used to define the money supply, both at the Federal Reserve and by outside ... Read Answer >>
  3. How is money supply used in monetary policy?

    Learn about the three components of the Federal Reserve's monetary policy. Understand how these three components use the ... Read Answer >>
  4. How much of the United States' money supply is M1?

    Learn how much money is in the M1 category of the United States money supply. Learn how M1 has averaged and changed over ... Read Answer >>
  5. How does the law of supply and demand affect monetary policy in the United States?

    Learn about how the law of supply and demand affects monetary policy in the United States. Changing interest rates leads ... Read Answer >>
  6. Will M1 ever become obsolete?

    Learn why the M1 money supply may evolve and transform into different mediums but will continue to remain in existence for ... Read Answer >>
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